HILFIGER v. TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY

OPINION BY JUSTICE ELIZABETH B. LACY
UPON QUESTIONS OF LAW CERTIFIED BY THE UNITED STATES
COURT OF APPEALS FOR THE FOURTH CIRCUIT

Present: All the Justices

Pursuant to our Rule 5:42, the United States Court of Appeals for
the Fourth Circuit certified three questions of Virginia law to
this Court regarding the enforceability of a life insurance
policy. The questions involve the application of Va. Code
?? 38.2-302 and -319. We accepted the questions by order
entered February 13, 1998.
The facts, as presented in the certification order,are as
follows.[1]
On January 28, 1995, James A. Hilfiger (Hilfiger) filled out an
application for a life insurance policy with Transamerica
Occidental Life Insurance Company (Transamerica) seeking
insurance upon the life of his father, Paul L. Hilfiger. On the
application form, Hilfiger answered all questions on his father’s
behalf, and where the form required the "signature of
proposed insured," Hilfiger signed his father’s name.
Deborah C. Highsmith, a Licensed Resident Agent of Transamerica,
signed the application as a "witness to all
signatures." Highsmith knew that Hilfiger was signing the
application on behalf of his father.
Hilfiger’s father did not see the life insurance application, nor
did he give Hilfiger written consent to sign his name. However,
Hilfiger claims that he spoke to his father about the policy, and
that his father gave him oral authorization to take out the
policy. The application named Hilfiger as the sole beneficiary
for the policy.
In May 1995, Hilfiger’s father underwent a medical examination in
connection with the life insurance application. At the medical
examination, Hilfiger’s father signed a form entitled "PART
II of an Application for Insurance to the Transamerica
Occidental Life." This form did not identify the type of
insurance applied for, who the proposed beneficiary was, or the
amount of coverage sought. Transamerica issued the insurance
policy on October 9, 1995.
On November 13, 1995, Hilfiger’s wife, Donna C. Hilfiger, became
a broker for Transamerica. Shortly thereafter, she executed an
amendment to the insurance policy as a Transamerica resident
agent. As with the original application, Hilfiger signed his
father’s name to the form. Hilfiger’s father did not see the
document, but Hilfiger asserts that he discussed the amendment
with his father. Nine days after the amendment was executed,
Hilfiger’s father became ill. He died four days later on December
3, 1995.
Transamerica refused to pay the proceeds of the life insurance
policy. Hilfiger filed a motion for judgment against Transamerica
in the Circuit Court of the City of Virginia Beach seeking the
proceeds of the policy, additional damages, and costs.
Transamerica removed the case to the United States District Court
for the Eastern District of Virginia and later filed a motion for
summary judgment. The federal district court granted
Transamerica’s summary judgment motion, concluding that the
execution of the policy did not comply with Code ? 38.2-302
and, therefore, was void. Hilfiger appealed to the Court of
Appeals.
In certifying the questions to this Court, the Court of Appeals
stated that the answers would be determinative of the proceeding
pending before it. We address the three questions in order.

I.

The Court of Appeals first asks:
Whether the son’s signing his father’s name as "proposed
insured" violates Va. Code ? 38.2-302, where the son
discussed the policy with his father, had verbal authorization to
apply for the policy, and his father later submitted to a medical
examination and signed a form entitled "PART II of an
Application for Insurance to the Transamerica Occidental Life?"

At common law, a policy of insurance taken out on the life of an
insured without the insured’s knowledge or consent by someone
other than the insured was usually held void as against public
policy. 1 Bertram Harnett & Irving I. Lesnick, The Law of
Life and Health Insurance ? 3.04[1][a] (1997). The
reason for this rule was the risk to the insured that a
beneficiary would be tempted to "hasten by improper means
the time when he will receive the benefits of the policy." Wood
v. New York Life Ins. Co., 336 S.E.2d 806, 809 (Ga. 1985); Hopkins
v. Hopkins, 614 A.2d 96, 100 (Md. 1992).
Code ? 38.2-302(A) codifies this common law principle,
stating in pertinent part that:
No contract of insurance upon a person shall be made or
effectuated unless at the time of the making of the contract the
individual insured, being of lawful age and competent to contract
for the insurance contract (i) applies for insurance, or (ii)
consents in writing to the insurance contract.

The statute provides the requisite protection for an insured by
identifying two alternative conditions for creating a valid
contract of life insurance. The specific conditions identified by
the General Assembly reflect an intent to require unequivocal
evidence that an insured approved the creation of a contract of
insurance on his or her life. With this purpose in mind, we
conclude that the facts in this case, as recited in the
certification order, do not establish proof of either condition.
First, the evidence in this case, that Hilfiger’s father knew
about the policy and orally authorized Hilfiger to apply for the
policy, does not constitute an application for the policy by the
insured as required by the statute.
At one time, the insured’s knowledge of the policy alone was
sufficient to establish compliance with the requirements of the
Code. Former Code ? 38.1-330, the predecessor to Code
? 38.2-302, provided in relevant part that "[n]o
contract of insurance upon the person . . . shall be
made or effectuated unless . . . the individual insured
. . . applies therefor, has knowledge thereof, or
consents thereto . . . ." In 1986, however,
the General Assembly eliminated the phrase "has knowledge
thereof," leaving the two current alternative conditions as
the only means of creating a valid contract of life insurance.
Acts 1986, ch. 562.
We also conclude, as Hilfiger acknowledges, that orally
authorizing another to take out a policy does not alone
constitute "applying" for the policy. If oral
authorization alone were enough to satisfy the application
requirement, the written consent alternative would be rendered
superfluous. Wren v. New York Life Ins. Co., 493 F.2d 839,
841 (5th Cir. 1974)(interpreting a similar statute).
Nevertheless, Hilfiger asserts that the application prong of the
section was satisfied in this case because his father
"materially participated" in the application process by
providing a medical history and submitting to a medical
examination. We disagree. "Material participation" in
the application process is not synonymous with applying
for the policy. As we have said, the purpose of the conditions
required for a valid contract of life insurance is to eliminate
any doubt that the insured knew about and agreed to the issuance
of the insurance contract. Here, providing medical information in
conjunction with the issuance of an insurance policy did not
reflect consent to the contract of insurance.
For the same reason, we reject Hilfiger’s contention that his
father’s signature on the medical examination form qualified as a
consent in writing to the insurance contract. The insured’s
signature on the medical form affirmed only that the information
provided on the form was correct. Although the form itself stated
that it was a part of an application for insurance, it contained
none of the terms of the contract. It was not, and could not have
been, a written consent "to the insurance contract" as
required by Code ? 38.2-302.
For these reasons, we conclude that the facts of this case do not
satisfy either alternative required by Code ? 38.2-302 for
the creation of a valid contract of life insurance. Accordingly,
we answer the first question in the affirmative.

II.

In the second certified question the Court of Appeals asks:
Whether the insurance policy should be enforced on behalf of the
beneficiary despite the violation of ? 38.2-302, in light
of Virginia Code ? 38.2-319’s provision that "[a]ny
insurance contract made in violation of the laws of this
Commonwealth may be enforced against the insurer?"

We answer this question in the negative. If Code ? 38.2-319
required enforcement of a policy issued in violation of Code
? 38.2-302, the protection for an insured intended by Code
? 38.2-302 could never be realized, and Code
? 38.2-302 would be meaningless. Code ? 38.2-319 does
not compel such a result.
By its own terms, Code ? 38.2-319 applies to a contract of
insurance which is "made" in violation of a law of the
Commonwealth. Code ? 38.2-302 declares that if the
statutory requirements are not met, no life insurance policy can
be "made or effectuated." Thus, in the absence of
compliance with the provisions of Code ? 38.2-302(A), no
contract of insurance is created, and any policy issued under
those circumstances must be void abinitio. Wood,
336 S.E.2d at 809, 811-12 (interpreting a similar statute). ContraJackson Nat’l Life Ins. Co. v. Receconi, 827 P.2d 118, 131
(N.M. 1992).
Here, no contract of life insurance was "made or
effectuated" because there was no compliance with Code
? 38.2-302(A). Therefore, Code ? 38.2-319 does not
require enforcement of the insurance policy issued by
Transamerica in this case.

III.

Finally, the Court of Appeals asks:
Whether an insurance company can be estopped to rely on
? 38.2-302 because its agent knew about the incorrectness
of the signature on the application?

Estoppel is an equitable principle that prevents one "whose
action or inaction has induced reliance by another from
benefiting from a change in his position at the expense of the
other." Employers Commercial Union Ins. Co. of America v.
Great American Ins. Co., 214 Va. 410, 412, 200 S.E.2d 560,
562 (1973). Hilfiger argues that Transamerica should be estopped
from relying on Code ? 38.2-302 to avoid payment on the
life insurance policy because it is charged with the knowledge of
its agents, both of its agents knew that the insured did not sign
the application form, and both agents failed to inform Hilfiger
of the consequences of that omission. This failure, Hilfiger
asserts, prevented him from taking the appropriate corrective
measures to secure a valid life insurance policy for his father.
We have addressed the application of equitable estoppel in the
context of enforcing insurance policies against an insurer. Id.;Reserve Life Ins. Co. v. Ferebee, 202 Va. 556, 118 S.E.2d
675 (1961); New York Life Ins. Co. v. Eicher, 198 Va. 255,
93 S.E.2d 269 (1956); Gilley v. Union Life Ins. Co., 194
Va. 966, 76 S.E.2d 165 (1953). And, as Hilfiger points out, we
have applied the doctrine to enforce an insurance policy based on
imputing to the insurer its agent’s knowledge of false statements
on the application. SeeGilley, 194 Va. at 974, 76
S.E.2d at 170. These cases all involved the level of knowledge
and complicity of both the agent and applicant in supplying such
false information. None of these cases, however, involved
consideration of whether the equitable doctrine of estoppel
should be applied in a manner which negates a significant public
policy codified by the General Assembly.
Jurisdictions addressing that situation have not been unanimous
in their conclusions or rationales. One court applied equitable
estoppel based on the theory that the statutory requirements for
a valid life insurance contract reflect a public policy to
protect the insured and the beneficiary, rather than to preserve
the public order and morals and, therefore, the statutory
requirements can be waived by the beneficiary. Adam Miguez
Funeral Home, Inc. v. First Nat’l Life Ins. Co., 234 So.2d
496, 499 (La. Ct. App. 1970). Another court concluded that the
failure to apply equitable estoppel under these circumstances
would allow insurers to perpetrate a fraud upon policyholders by
accepting premiums on a policy, knowing that the policy was void
from the beginning. Holmes v. Nationwide Mut. Ins. Co.,
244 N.Y.S.2d 148, 153 (1963).
In contrast, equitable estoppel has not been applied in these
circumstances on the theory that its application would invite
beneficiaries and insurers’ agents to create a binding contract
of insurance on the life of another in direct contravention of
the policy addressed by the common law and statutes in imposing
requirements for a valid policy. Hunt v. Pyramid Life Ins. Co.,
732 S.W.2d 167, 169 (Ark. Ct. App. 1987); Time Ins. Co. v.
Lamar, 393 S.E.2d 734, 735-36 (Ga. Ct. App. 1990).
We are persuaded that the better rationale is not to apply
equitable estoppel to enforce a life insurance policy issued in
contravention of Code ? 38.2-302. That statute was not
enacted for the protection of the beneficiary but to protect the
insured against potentially improper motives of the beneficiary.
Thus, contrary to the conclusion reached elsewhere, we conclude
that a beneficiary is not entitled to waive the statutory
requirements. As we have already stated, applying Code
? 38.2-319 to enforce a contract which Code
? 38.2-302 renders void abinitio eliminates
the very purpose of the statute. To apply equitable estoppel in
these circumstances also:

would permit the
unreasonable result that [the conduct of an insurance company or
its agent] would breathe life into an insurance contract which
the General Assembly [for reasons of individual and public
protection] intended to have no life, and would frustrate the
strong public policy that no contract for life insurance should
be made unless the insured applies for or consents in writing to
the contract.

Lamar, 393 S.E.2d at 736 (citing Wood, 336
S.E.2d at 812).
Accordingly, we answer the third certified question in the
negative.First certified question answered in the affirmative.
Second certified question answered in the negative.
Third certified question answered in the negative.

JUSTICE KINSER, with whom JUSTICE KOONTZ joins, dissenting.

I would construe Code ? 38.2-302(A) differently from the
majority and would, therefore, answer the first certified
question in the negative. I agree that the statute identifies
"two alternative conditions" for making a valid life
insurance contract, allowing a proposed insured either to apply
for life insurance or to consent to such a contract. However, as
I understand the majority’s position, a proposed insured’s oral
authorization combined with "material participation" in
the application process does not constitute "applying"
for the insurance contract. I disagree.[2]
The part of Code ? 38.2-302(A) at issue provides that no
life insurance contract is made or effectuated unless "the
individual insured . . . (i) applies for insurance, or
(ii) consents in writing to the insurance contract." The
statute fails to define "applies;" therefore, the term
must be "given its ordinary meaning, given the context in
which it is used." Dep’t of Taxation v. Orange-Madison
Coop. Farm Serv., 220 Va. 655, 658, 261 S.E.2d 532, 533-34
(1980). "The context may be examined by considering the
other language used in the statute." City of Virginia
Beach v. Bd. of Supervisors of Mecklenberg County, 246 Va.
233, 236-37, 435 S.E.2d 382, 384 (1993).
Examining the language chosen by the legislature, I find it
significant that the phrase "in writing" appears after
the disjunctive "or" and immediately following
"consents" and that the two phrases, "applies for
insurance" and "consents in writing," are
separately identified by the designations "(i)" and
"(ii)." As a general rule, "proper grammatical
effect will be given to the arrangement of words in a sentence of
a statute," Harris v. Commonwealth, 142 Va. 620, 624,
128 S.E. 578, 579 (1925), and a presumption exists that the
General Assembly understood basic rules of grammar when drafting
the statute. Frere v. Commonwealth, 19 Va. App. 460, 464,
452 S.E.2d 682, 685 (1995). Fundamental rules of grammar require
the placement of a phrase so as to indicate clearly what the
phrase modifies. John C. Hodges et al., Harbrace College Handbook
249 (12th ed. 1994).
Applying this rule to Code ? 38.2-302(A), the phrase
"in writing" modifies "consents," the word
immediately preceding the phrase, and does not modify
"applies." But seeAlleman v. Lincoln Nat’l
Life Ins. Co., 636 F.2d 1195, 1196 (10th Cir.
1981) (holding that writing provision in Utah statute, which
states that "[n]o life . . . insurance contract
. . . shall be made . . . unless
. . . the individual insured . . . in writing
applies therefore [sic] or consents thereto," modifies not
only "applies" but also "consents"). By
choosing not to modify "applies" with the phrase
"in writing," the General Assembly intended not to
restrict the method by which an individual can apply for
insurance. SeeForst v. Rockingham Poultry Mktg. Coop.,
Inc., 222 Va. 270, 278, 279 S.E.2d 400, 404 (1981)
("When the General Assembly uses two different terms in the
same act, it is presumed to mean two different things.").
Moreover, when the General Assembly has intended for a proposed
insured to apply for insurance in writing, it has so stated. See
Code ? 38.2-3737(A) ("No contract of insurance upon a
debtor shall be made or effectuated unless . . . the
debtor . . . applies for the insurance in writing
. . . ."). Thus, the General Assembly knows
what language to use when it wants to condition the making of an
insurance contract upon submission of a written application.
Therefore, in my view, under the provisions of Code
? 38.2-302(A), consent to an insurance contract must be in
writing, but the act of applying for insurance is not confined to
any particular form. In other words, the mode of applying for a
life insurance contract is not limited to a written application
personally signed by the proposed insured. AccordWalker
v. Jackson Nat’l Life Ins. Co., 20 F.3d 923, 924-25 (8th
Cir. 1994) (holding that insured can apply for insurance without
signing application).[3]
While rules of grammar are not permitted to defeat the purpose of
a statute, Harris, 142 Va. at 624, 128 S.E. at 579,
construing "applies" to denote more than the narrow
meaning of an application signed by the proposed insured does not
thwart the common law principle that Code ? 38.2-302(A)
embodies. A proposed insured’s signature on an application form
is not critical to proving that the individual applied for
insurance if other facts evidence the proposed insured’s intent
to apply. SeeWalker, 20 F.3d at 925 (finding that
signature of insured on insurance application was not crucial to
proving his knowledge of policy and identity of beneficiary); Crump
v. Northwestern Nat’l Life Ins. Co., 236 Cal. App.2d 149, 155
(1965) (holding insured’s signature not essential where insured’s
agent prepared application and insured later ratified insurance
contract). In other words, if the facts show that the proposed
insured acted with the purpose of obtaining life insurance, then
no risk exists of "allowing one person to have insurance on
the life of another without the knowledge of the latter." Walker,
20 F.3d at 925.
In the instant case, the actions of Hilfiger’s father show that
he applied for insurance as contemplated by the provisions of
Code ? 38.2-302(A). Because the district court granted
summary judgment to Transamerica, the facts and inferences must
be construed in the light most favorable to Hilfiger. United
States v. Leak, 123 F.3d 787, 794 (4th Cir. 1997).SeealsoAnderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249 (1986) ("at the summaryjudgment
stage the judge’s function is not . . . to weigh the
evidence and determine the truth of the matter"). The facts
show that Hilfiger orally discussed the policy with his father
and that the father verbally authorized his son to obtain the
policy. As the United States Court of Appeals for the Fourth
Circuit stated in its certification order, "we can infer
that the insured father ‘authorized’ Hilfiger to sign for him and
provided the answers which Hilfiger filled in on the application
forms." Moreover, the father underwent a medical exam during
which he signed a form titled "Part II of an Application for
Insurance to the Transamerica Occidental Life." Thus, the
evidence shows not only oral authorization, but also undisputed
overt actions on the part of the father that not only corroborate
his oral authorization but also establish his participation in
the application process. This is not a case of mere oral
authorization, which, as the majority observed, would render the
written consent alternative superfluous.
Given these facts, I conclude that Hilfiger’s signing his
father’s name as the "proposed insured" does not
violate Code ? 38.2-302. As the majority stated,
"[T]he purpose of the conditions required for a valid
contract of life insurance is to eliminate any doubt that the
insured knew about and agreed to the issuance of the insurance
contract." That purpose is fulfilled in this case.
Accordingly, for these reasons, I dissent.[4]

FOOTNOTES:

[1]Because the federal district
court granted summary judgment in favor of Transamerica
Occidental Life Insurance Company, the facts are presented in the
light most favorable to Hilfiger. United States v. Leak,
123 F.3d 787, 794 (4th Cir. 1997).[2]
Notably, the majority states only what action is insufficient to
apply for a life insurance contract and fails to delineate or
define specifically the requirements necessary to apply for
insurance under Code ? 38.2-302(A).[3]An
example of a statute that plainly requires a written application
signed by the insured is Mass. Gen. Laws Ch. 175, ? 123
(1998). This section states that "[n]o life company shall
issue any policy of life or endowment insurance . . .
except upon a written application therefor signed or assented to
in writing by the person to be insured . . . ."[4]Because I would answer the
first certified question in the negative, I need not address the
remaining two questions.